Jun 22

Long Term Mortgages: Buyer Beware

Whereas it used to be 25 year mortgages – now 40 year mortgages are becoming increasingly popular.

Longer term mortgages are becoming popular, increasingly amongst the young and first time buyers. It is easy to see why: deposits are often less, more money can be borrowed, and so a more expensive home can be bought. Further, the monthly repayments are usually less. Those and other immediate and short term advantages make mortgages with terms of over 30 years very attractive to so many home buyers, especially first time buyers.

thHowever, leading lenders have started to express their concerns – particularly for the long term. This is because the interest on the mortgage loan adds up over the term of the mortgage, effectively making the loan very expensive, and potentially harder to pay back, even over decades. Lenders and regulators are warning that many home buyers are effectively draining their future wealth and savings to pay the interest back, whilst making a short term advantage in buying that dream, expensive property.

For a typical mortgage with a 25 year term, an average monthly repayment would be £948. If the mortgage was for 40 years, then that becomes £716 per month – a saving of over £200 per month. That is what appeals to so many buyers. The interest paid each month stays the same, but the repayments of capital (forming part of that monthly bill) are spread out over a longer time period.

However, the home buyer over those 40 years will have to pay interest for an extra 15 years. In this example, that would mean paying an additional £60,000; the interest over 25 years adds up to around £84,000, but the total over 40 years is £144,000. The home owner is paying more, and for longer.

Having calculated those figures, according to David Hollingworth, from London & Country Mortgages, said that “it’s a real danger. [Those buyers] need to understand that they are going to pay thousands more in interest over the life of the mortgage.” He suggests that they keep their mortgages under regular review, and shorten the payback time as soon as they can afford to make higher payments; this strategy will “save them a fortune”.

Further issues to consider are interest rates, value and income. What if interest rates rise? What if the value of the property changes over time? What if the household income remains the same, despite inflation, interest rates, and similar? It is impossible to prepare and plan personal finances for 40 years. If choosing a 40 year mortgage, it is necessary to know that the buyer will have that long term financial stability to repay over a longer period.

Recent years have seen a tightening up of mortgage regulations and lending, with stricter controls for lenders on what buyers can afford with their regular incomes. There are currently no rules limiting the length of mortgage terms, or from stopping families who already have financial issues from committing themselves to a mortgage for four decades.

Those borrowers are effectively putting off the day of reckoning, and unintentionally draining their future wealth. Whatever the immediate advantages – 40 year mortgages are ultimately a case of buyer beware.

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Mar 22

Gap in UK House Prices Increases

house-pricesThe gap between house prices in England and those in the rest of the UK has grown significantly wider over the past year, according to recent statistics. In the year leading up to the end of January, England’s house prices grew at a significantly faster rate than those of other UK territories, resulting in a wider disparity than ever before.

Following a slow period last summer, house prices picked up across most of the UK. However, according to the most recent figures from the Office for National Statistics (ONS), no other part of the country even came close to the levels of growth seen in England.

Over the full twelve month period, Wales was the only territory that saw overall shrinkage of house prices. Property values in Wales fell by a total of 0.3%. Prices in Scotland achieved growth of 0.1%, and those in Northern Ireland grew fully eight times faster with an increase of 0.8%.

However, all of these pale in comparison to the levels of growth seen in England. The average English property price grew more than ten times as fast as that of Northern Ireland over the twelve months to the end of January, increasing by 8.6% overall.

According to the data released by the ONS, London and the South East played a key role in driving the increase in English house prices. London prices grew by 10.8% over the year leading up to the end of January, and the average property in the surrounding South East region grew in value by 11.7%. When London and the South East – which commonly experience above-trend growth due to London’s central role in the UK economy – are excluded, English house prices grew by 5.1% over this period. Though somewhat more modest, this is still a rate of growth that eclipses Scotland, Northern Ireland and Wales. The fastest-growing region outside the South East was the East of England, which saw prices grow by 9.8%.

Various sources and surveys record regular data on the movement of the UK’s housing market. The ONS – the UK’s official statistical body and therefore one of the most highly-regarded sources, uses data from the Council of Mortgage Lenders Regulated Mortgages Survey. As such, it analyses data from property purchases made with mortgages from many of the country’s lenders, but excludes cash purchases.

The widening of the gap and the rate of England’s price increases compared to the rest of the UK have raised concerns about the affordability of property for ordinary buyers. Shelter chief executive Campbell Robb said: “It’s time for the government to get serious, and invest in the genuinely affordable homes that we desperately need.”

Dragonfly Property Finance managing director Mark Posniak, meanwhile, commented that London is likely to continue being “a formidable bastion” of the property market, but that its prices have become “an insurmountable obstacle” for a large portion of buyers.

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Jan 15

Decisions for the Bank of England as Mortgage Debt Rises

Setting off further suggestions that the Bank of England might have a long awaited interest rate rise in 2016, a recent report states that mortgage debt has risen for the average household to £85,000.

According to the Bank of England report, a real rise in wages, and lower inflation, means that households are better placed to deal with a rate rise. Threadneedle Street concluded that the economy seeing a 2% rise in average wages in 2015, along with low inflation, had increased disposable household incomes enough for the average mortgage-payer to cope with a 2% rise in base interest rates in 2016.

Evidence suggests that the average household has mortgages of £85,000. This is rise from £83,000 on average in 2014, due to rising house prices, and a significant demand from first time buyers. Other unsecured household debt, such as car loans and credit cards, remained around the same from 2014, at an average per household of £8,000. Many economists and experts seem to agree that those levels of household debt are likely to rise over 2016, to an estimated £10,000, in many cases due to the complacency of borrowers.

At the same time, figures show that annual wage rises reached an average of 2.7% in April 2015, but fell back in the last few months of the year. Minouche Shafik, a Deputy Governor at the Bank, said that the rate of growth in earnings had levelled off recently, and that additional factors also helped to keep inflation low, citing amidst other factors a strong pound and a fall in commodity prices. She has also recently stated her intention not to vote for an interest rate rise until she is convinced that earnings growth us once again above 2%.

That aside, overall these factors all give rise to a good set of circumstances to justify interest rates rises, as long predicted for 2016. The data gives reassurance to policymakers that any rate rise will only have a limited impact on the ability of most households to meet mortgage and debt repayments. However, the data also suggests that first time buyers (with high loan to income mortgages) and low income households would probably struggle if rates were raised. The knock on effect on house prices and the housing market would also impact upon renters, an increasingly large percentage of the housing market. Many are beginning to struggle with rent payments – and if prices increase that social problems could just get worse.

It is a tough decision for Threadneedle Street. This is especially as the study also found that households would limit their spending by much more than savers would increase their own spending. This would lead to a contraction that would actually harm GDP growth. This trade-off between an interest rate rise, financial austerity, and disposable income levels has caused much discussion in Threadneedle Street, and has greatly contributed to delays in raising interest rates.

2016 is seen by many as a crucial year economically. Although January has started the year with serious economic issues globally – building on an overall positive 2015 can see finally a breakthrough, growth and stability.

With that in mind, which way will the Bank of England go? With household debt at those levels, a rate rise is realistic – but at what cost and what economic impact elsewhere? Threadneedle Street need not rush, though, in making such decisions; it is still only January. However that uncertainty is bad for economists and household alike.

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Sep 17

Mortgage Lending in Recovery

mortgageLending for UK home purchases is bouncing back from a recent dip, according to the latest data. Mortgage lending so far this year, across just the first eight months, has exceeded total annual lending figures recorded during the global financial crisis.

£20 billion was lent in mortgages over the course of August, and this brought the total for the year so far up to £138.6 billion, according to figures recently released by the Council of Mortgage Lenders (CML). This means that, with four months of the year still to go, mortgage lending has already exceeded the entire annual figure for 2010, when just £133.8 billion was lent in mortgages across the whole twelve months of the year. This year’s lending total has also already edged ahead of the full year total for 2011, which saw mortgage providers grant a total of £138.3 billion in credit for property purchases. Based on these figures, the CML said that this year, the mortgage lending market is “ enjoying its best spell since 2008.”

Year-on-year, mortgage lending in August showed a 12% increase on the totals for August 2014. Last year, August’s mortgage lending figures were partly held back by the introduction of new rules, which were slowing down many new applications as well as discouraging some people from making applications. August’s figure was down 8% compared to July, which is in line with common trends. The tendency of August to be a slower month than July is believed to be down in large part to the number of people taking summer holidays.

The strength of activity this year is partly being put down to the number of homeowners seeking to remortgage their properties. As forecasts suggest that the next few months may see the Bank of England finally start to increase interest rates, many homeowners on variable rate mortgages are looking at switching to a new deal in the hope of being better off in the event of a base rate rise than they would have been if they had not remortgaged.

The CML represents a large number of lenders including banks and building societies both large and small, as well as other firms that provide lending for property purchase. Collectively, the businesses and organisations represented by the CML provide around 95% of the UK’s mortgage lending by total value. The CML’s data, which it releases regularly, is therefore held as one of the most complete and accurate measurements of UK mortgage lending.

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Jul 16

MPs to get 10% Pay Rise

The Independent Parliamentary Standards Authority (IPSA) has confirmed that MPs will receive a 10% increase in their salary. The annual pay of an MP will increase by almost £7,000, rising from the current level of £67,060 to £74,000.

The approval of the 10% pay increase is likely to prove controversial, as even its beneficiaries have often not been in favour of the idea in recent discussions. Downing Street and a number of MPs have said that an increase in pay is “not appropriate.” In the run-up to the General Election in May, a number of parties promised that if they were elected into power they would accept a cut to MPs pay in order to reduce strain on the public purse.

Now that the increase has been confirmed several MPs, including Andy Burnham, Liz Kendall and Yvette Cooper who are contending for leadership of the Labour party, have said that they will forego the increase. Still others, such as Education Secretary Nicky Morgan, have expressed an intention to donate the extra money to charity.

Sir Ian Kennedy, chairman of the IPSA, described the issue of MPs’ pay as a “toxic” one, and said that the matter “had been ducked for decades.”

Nonetheless, Sir Ian insisted that the pay rise MPs are to receive is not going to cost the public anything, because it is being offset by cuts to the various benefits and allowances MPs are to receive. Expenses claims, severance payments and pensions are all being cut to make room for the increase in salary.

The IPSA, which was set up in the wake of the 2009 expenses scandal, also said that there would be changes to the way future increases in MPs’ pay were made. From now on, the IPSA said, the salary received by MPs would rise in proportion to the average increase of wages in the public sector. This seems to indicate something of a turnaround since previous statements made by the IPSA, which suggested that MPs’ pay rises would be linked to average earnings. The latter is predicted to be higher over the next five years than the average public sector pay increase, meaning that the new stance is likely to result in more modest pay rises in years to come.

This change is also important because, at some times in the past, average public sector pay increases have been shown to be negative due to factors such as job cuts. If the average wage in the public sector decreases again and MPs’ pay is linked to it, this means that MPs will see their pay fall instead of rise.

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May 22

Government Borrowing Drops to £6.8 Billion

Government BorrowingThe most recent official figures show that UK government borrowing fell in April to a level of £6.8 billion. This is a significant year-on-year drop, with the figure standing at £9.3 billion in April 2014.

This year’s is therefore the lowest April level of government borrowing since 2008. In April of that year, the total amount of borrowing by the government stood at £2.5 billion.

Estimates of the total amount of government borrowing over the financial year have been revised upwards by the Office for National Statistics (ONS). Previously, the ONS estimated £87.3 billion of total borrowing but now this figure has been increased to an estimate of £87.7 billion over the whole financial year. However, this still remains noticeably lower than the government’s target of £90.3 billion.

Currently, it is too early in the financial year for experts to make any meaningful predictions about the specifics of what these figures could mean. Furthermore, the ONS itself has warned that borrowing figures from the earliest several months of a financial year are frequently subject to later revision. However, the apparent drop in government borrowing has been tentatively taken as a positive sign for the immediate future of the UK economy.

The UK’s economy experienced growth of 0.3% in the three months leading up to the end of March, according to official figures released last month. This compares to 0.6% growth in the previous quarter – the last three months of last year.

In the Budget that was released in March, Chancellor George Osborne forecast a total of £75.3 billion net public sector borrowing over the course of this financial year. In July, Osborne plans to hold a new budget, in which he is expected to outline his strategy for bringing down the deficit. Osborne’s strategy is expected to aim for complete elimination of the deficit before 2018, and a budgetary surplus in the 2018/2019 financial year.

It is believed that this strategy will involve significant reductions in welfare spending, with cuts in this area amounting to a total of £12 billion. Including these cuts to welfare, it is expected that government departments will face a total of £30 billion in spending cuts in order to fund the elimination of the deficit. Government borrowing targets may also be subject to revision under Osborne’s plans.

According to a spokesperson for the Treasury, the recent drop in borrowing shows that the government’s efforts are bearing fruit. “We have more than halved the deficit,” the spokesperson said, “but at just under 5%, it is still one of the highest in the developed world.”

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Mar 31

UK Banks Must Prove They can Withstand Another Slump

This year’s banking stress tests from the Bank of England will introduce a new element not seen on previous occasions. This year, the stress tests will require the banking industry of the UK to prove that it will be able to withstand another slump in the global economy.

This move comes a few months after the former chief of the bank, Mervyn King, said that the banking system remained weak and may not be able to withstand another financial crisis without improvements first being made.

Bank of England stress testing is a relatively recent concept, dating back to 2013. It is carried out annually, and seeks to assess the strength of the baking system and its potential vulnerabilities by examining it in detail and reporting on its ability to handle various hazards and eventualities. The 2014 stress test looked primarily at vulnerabilities in the banking system that relate to the housing sector.

The parameters of this year’s banking stress tests have been set out by the Bank of England. It will explore a number of eventualities that would relate or potentially lead to another global financial crisis.

For instance, the report will assess the system’s ability to survive should economic growth in the Eurozone suffer a sharp downturn. Major banks and building societies will be required to present evidence that they are in a sufficiently strong and stable position to survive if the Eurozone’s economic output should fall by up to 2%.

The stress tests will also look at how vulnerable the UK banking system would be to a collapse in economic growth in China – one of the world’s most important economies and one to which the UK banking industry has significant exposure. In particular, should China experience economic growth of only 1.7%, Hong Kong would fall into a serious recession. The Hong Kong property sector is an important one for many UK firms including HSBC, and these firms would be hit hard as prices drop by an estimated 40%. As part of this year’s stress tests, banks will have to prove that they would be able to survive should this eventuality come to pass.

Furthermore, the tests will look at what would happen should the UK see serious economic contraction. The Bank of England will assess whether banks could withstand total contraction of 2.3%.

Last year’s tests were considered thorough, so it is a surprise to some that this year the tests seem even stricter. However, this year’s tests will remedy one common criticism of last year’s report – that it focussed solely on the UK and ignored the many international vulnerabilities that UK banks and building societies hold.

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Jan 17

ISA’s & Interest Rates

To maximise your savings, many financial advisers recommend ISA’s

Such Individual Savings Accounts (ISA) are tax free savings where a wide range of investments (cash, stocks, shares, etc.) can be invested in. There is no income tax to pay, and no tax on profits. The interest rates are usually relatively high. These factors make ISA’s great for long term savings.

Savvy savers already know all about ISAs, with many already investing in one. January 2015 sees the usual deadline of April and the end of the financial year looming, and only a few months left to make the most of the cap on Isa’s, which under new rules allows for up to £11,880 to be invested by any one person in their ISA.

April 2015 will see savers allowed to invest as further £11,880 over the next financial year, if they so desire. Financial advisers regularly recommend ISA’s as a convenient method of long term savings, with guaranteed and tax free returns, and (in some cases) a degree of flexibility. Even if not utilised fully, ISA’s are still a very well recommended method of saving.

Despite that, the issue over interest rates remains. In 2007, prior to the great economic crash, ISA rates stood at a respectable 5.5% on average. Following the crash, rates slumped dramatically. 2014 saw ISA rates on a one year’s cash ISA fall to 1.6% on average.

Recently, the Bank of England’s Monetary Policy Committee (MPC) kept interest rates at 0.5%. All the indications are that that rate is set to remain until mid-2016 or so. Given the instability in the Eurozone, and recent quantitative easing (QE) from the European Central Bank (ECB), it is unlikely that the Bank of England will be in any rush to raise interest rates.

2014 saw predictions that interest rates would rise. That was dashed by Threadneedle Street. Now, revised estimates and predictions have the interest rates pegging at the same low level for some time.

This trend could be seen for some time to come, according to financial advisers and economists. According to Wealth Horizons financial advisers, even the most dramatic of financial predictions have seen the Bank of England’s interest rates at 1.5% in 2020, meaning that ISA savers will have to wait until around 2025 before the generous rates of old are seen again.

With interest rates likely to remain low for the foreseeable future, many banks are offering, and many savers are settling for, a fixed rate ISA. Such ISA’s will pay more interest- but will tie up savings and cash for longer. Generally, the longer the savings are tied up for- the higher the returns will be. Also, such a fixed rate ISA over the long term gives the saver a feeling of stability and security. The great benefit of the fixed rate account is the very fact that interest rates are going to be low for a good few years. As such, the interest accrued on the capital over that long term will be greater than the interest accrued in shorter, more flexible savings. Consequently, such long term, fixed rate ISA’s can actually be a very good option. However, if interest rates do start to rise, than that advantage is lost.

A further matter for ISA savers to consider are ‘teaser rates’; high interest rates which banks boldly advertise. According to Chris Williamson, the head of Wealth Horizons “Isa savers are often drawn into headline grabbing rates in the run up to the Isa deadline – teaser rates which then vanish after a few months.. People should never assume that the price they get when they open the account is what they will have for the lifetime of the Isa.” Financial regulator the Financial Conduct Authority (FCA) has long criticised the practice- but has yet to take any affirmative action against banks and teaser rates.

Susan Hannums, director at a savings advice web site said that recent years have seen a disconnection between bank savings rates, and the national base interest rate. Thousands of variable savings rates have been cut, with no movement in the base rate for nearly seven years. According to Ms Hannums “there seems little reason to believe that when rates do start to rise that all savers will reap the full benefit.” She further advises savers not to “put all your eggs in one basket. Spread your money between a mix of accounts from high-interest paying current accounts, fixed-rate bonds, and accessible variable-rate accounts – which would allow you to take advantage of the best rates on offer now, whilst keeping some cash accessible should better rates become available”

According to some financial advisers, as of January 2015, the Post Office seemingly offers some of the best ISA’s currently.

For fixed rate ISA’s, the Post Office offers the best rates, at 1.95pc (two years) and 2.1% (three years) Virgin Money offers the best rate (1.7%) for a one year ISA)

For flexibility and easy access, the National Savings and Investment (NS&I) Direct ISA offers instant access, no notice withdrawals- and 1.5% interest.

Other notable ISA on offer include a Virgin Money three year fixed rate ISA at 2.15%. For variable rates, Hinckley & Rugby and Furness building societies offered ISAs at 1.6%.

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Sep 02

New ISA Rules Boost Savings Deposits

According to major High Street banks, July saw a significant increase in the total value of savings deposits. The rise is being attributed to the introduction of the New ISA (NISA) rules first announced by Chancellor George Osborne in this year’s Budget.

Figures reported by the British Bankers’ Association (BBA) show that July saw a total of £4.9 billion deposited into the new NISA accounts as savers were keen to take advantage of increased flexibility and, in particular, the newly-increased £15,000 tax-free limit. Last July, deposits totalled a much lower £18 million.

Usually, a surge in savings deposits is seen in April at the start of the new tax year, when ISA holders benefit from the start of a fresh annual allowance. However, April deposits this year were lower than in previous years. Only £3.9 billion worth of savings deposits were made in April this year, compared with £6.3 billion in April 2013 and £7.5 billion in April 2012. Instead, a surge was seen in July, similar to the surges that usually take place at the start of the tax year. This suggests that a large number of savers were specifically holding out for the new rules to take effect before making their deposits.

ISAs or the newer NISAs are held by approximately 23 million UK adults, which equates to around half of all adult individuals in the country. However, low interest rates mean that yields from these accounts are currently very low. Bank of England figures suggest that the average saver is only getting a 0.86% return from their ISA, or 86p for every £100 of funds held. The increase in the annual allowance was introduced in an effort to help savers reap greater levels of benefit from the use of tax-free savings accounts.

Cash-only savers especially benefitted. The rise in the annual allowance was coupled with the scrapping of the rule stating that only half your allowance could be held in cash. This meant that savers who do not wish to hold stocks and shares experienced an effective near-tripling of the limit. Where previously cash-only savers could only hold £5,760 tax-free in an ISA, they can now hold up to £15,000.

Those who do wish to hold stocks and shares in an ISA also benefit from increased flexibility. Stocks and shares can be mixed with cash in any combination to make up the total ISA allowance. Money held in stocks and shares ISAs from previous tax years can be transferred into new cash NISAs to take advantage of the increased cash limit, though this may be partially subject to terms from individual providers.

 

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Jul 08

New ISAs: How to transfer safely from stocks & shares to cash

The new super ISA regme which takes place on July 1st will allow investors for the first time ever to make a money transfer from shares and stocks into cash ISAs. However, this scheme must be treated with caution in order to avoid losing out on the tax benefits from the savings stack.

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This rule change will most certainly be welcomed with open arms by people who are soon to retire who may want to cash out and not leave their savings exposed to the stock market. Further, those savers who are getting married or looking to purchase a house will also welcome the scheme as the may want to put aside their gains and protect a chunk of their savings.

However, the most important crucial aspect of the transaction is to avoid simply withdrawing you savings from the investment Isa and depositing it into the cash ISA. Doing this will erode the tax free perks. 

The first step in any transaction is foremost to decide where you would like to transfer your money. If you have not taken out a cash Isa so far which started on 6th April then you still have an opportunity to shop around for an account which offers a good interest rate. The rate on instant access accounts tends to be lower although they offer greater flexibility and perhaps less commitment by the saver. The good and competitive rates are handed over to savers who are prepared to lock out their money for a number of years this usually being from one to five years. 

If you are however one of those people who have already taken out a cash Isa this year check that is can accept transfers from different ISAs. If you have a fixed rate ISA then there is the possibility that you may be unlikely to be able to add proceeds from shares and stocks. 

Next, you are to fill out a transfer form telling your banking institution to transfer money from a shares and stocks ISA. Details of your investment ISA as well as the provider and the number of the account will be necessary.  The new ISA provider will then send over a transfer request to the provider of the stocks and shares ISA which will then act according to your instructions. Upon settling the sales and closing fees being deducted the money will be found in the cash new ISA with the provider.

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